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litigation costs during 1993. By reversing petitioner’s
reporting of reimbursement income, respondent chose not to rely
on tax benefit principles. Respondent relied solely on section
481 to correct any improper prior year benefit and to cause the
inclusion in income of the reimbursed costs. Therefore,
petitioner is not entitled to deduct the litigation costs for its
1993 taxable year, and no section 481 adjustment is appropriate
for petitioner’s 1993 tax year.5
Finally, we note that respondent did not include in the
reversal of the reimbursements the aggregate of the $400 amounts
CSAA advanced to petitioner upon the beginning of each case.
Under petitioner’s approach the $400 amounts were included as
part of the reimbursement income reported. On brief, respondent
contended that petitioner had unrestricted use of the $400
amounts because they were first deposited in petitioner’s general
bank account and then transferred to a segregated account for
payment of litigation costs. Accordingly, respondent did not
reverse the $400 amounts out of income or include them in the
section 481 adjustment. Petitioner, however, has not
5 There is some question as to whether tax benefit
principles apply where a deduction was improperly or erroneously
taken (as it was in this case). We note, however, that an appeal
of this case would normally be to the Court of Appeals for the
Ninth Circuit, where tax benefit principles have been held to
apply concerning improper or erroneous deductions. See Unvert
v. Commissioner, 656 F.2d 483 (9th Cir. 1981), affg. 72 T.C. 807
(1979).
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